Catalyst Business Energy Market Brief June 2014

Spot prices hit four-year lows with strong supply picture

Despite rising commodity prices, domestic power and gas prices fell in May, with spot prices hitting their lowest levels since October 2010. International commodity markets were generally bullish. Brent crude oil climbed 0.8% to average $109.0/bl as further violence in Ukraine and Libya increased security of supply fears. Ukraine tensions also influenced coal prices, which rose 1.6% over the month to average $82.7/t. Coal production in Eastern Ukraine and in parts of Russia has been affected by recent events.

In contrast, carbon prices continued recent downward trends, dropping 1% to average €5.2/t in May. Negative sentiment remains in the market as low fossil fuel burn across Europe (down 3% on 2013) has reduced demand for permits.

Domestic storage supply offsets Ukraine tensions

Gas prices continued to fall through May. Longer-term prices remained volatile with events in Ukraine, though the recent national election there has helped to stabilise prices. The annual October 14 gas contract decreased 1.9% over the month to average 59.2p/th.

Trends in gas fed into power contracts. Gas dominated the generation mix throughout May due to coal plant outages, helping annual October 2014 1.1% lower to average £50.1/MWh for the month. Both power and gas winter contracts continued to fall as a result of high gas storage data, which was on average 43 percentage points higher for the month compared with May 2013.

The month ahead: surplus gas and lower demand

The UK-Belgian interconnector, which is currently exporting gas to Belgium, is due to close for 17 days from 11 June for annual maintenance. This could potentially “trap” gas in the UK, creating greater domestic supply and reducing prices.

National Grid’s summer outlook report, released April 2014, has forecast UK average demand for June to August at 500MW below last year’s levels. The company said any recovery in the economy is unlikely to stop trends seen over the last decade, with power consumption falling 10% in the last decade.

Catalyst Commercial Services’ independent approach enables clients to manage their exposure to energy price risk, while at the same time benefiting from a first class service from a range of major and independent suppliers. Catalyst Commercial Services’ procurement solutions make it simple, so contact a member of the team to discuss requirements.

The annual October 2014 marker dropped 1.9% to average 59.2p/th over the month.

The Winter 2014 contract decreased 2.3% to a monthly average of 62.0p/th. But the contract was volatile in the 61p/th-63p/th range owing to events in Ukraine.

Spot gas prices

Spot gas prices tumbled 9.7% in May to average 45.7p/th. Prices were pulled lower by above average temperatures throughout the month and further continental and LNG deliveries.

Day-ahead gas fell to 43.7p/th on 27 May, its lowest level since October 2010.

The front-month contract fell to its lowest level in four-years in May and averaged 45.5p/th in May.

Annual power prices

Annual electricity prices declined in May, following continued downward trends in gas.

Annual October 2014 power dropped by 1.1% to a monthly average of £50.1/MWh.

The winter 2014 contract fell 1.8% to average £50.3/MWh.

Spot power prices

Day-ahead power prices declined in May as below average demand for power and falling spot gas prices influenced the market.

Day-ahead electricity prices fell 6% to an average of £39.6/MWh. The contract hit a four-year low of £37.7/MWh on 23 May with rises in wind and nuclear output.

Month-ahead power prices dropped 6% to average £39.6/MWh.

Government cuts back support for solar farms

Large-scale solar projects will be unable, from next year, to access one of the key support mechanisms for renewable technologies, under new plans unveiled by the government.

Exceeding expectations

In its Solar Photovoltaic (PV) Strategy, which was published in April, the government confirmed its intention to shift the emphasis for growth in the solar sector away from ground-mounted developments and to the UK’s 250,000 hectares of south-facing commercial rooftops. The decision reflected growing concerns over the speed at which large-scale solar continued to be deployed in the UK. Industry projections indicated that, by 2017, significantly more solar might be built than the 4GW deemed affordable by the government as part of its budget for low-carbon power. In a consultation, issued on 13 May, the government proposed to close the Renewables Obligation (RO) to solar developments of above 5MW from April 2015. This is two years earlier than the mechanism, which has subsidised renewables projects since 2002, will close to other technologies.

Continuing review

The consultation assured that large-scale solar developments would remain able to access the contracts for difference regime, which is being implemented this year and will from 2017 be the only subsidy scheme for major low-carbon projects. Solar projects below 5MW will remain able to apply for support through the RO until 2017, or through the small-scale feed-in tariff (FiT) scheme. But the government plans further changes to the FiT mechanism, which again aim to incentivise rooftop solar deployment over ground-mounted projects. The consultation stressed that, if solar capacity continued to be deployed faster than anticipated, it might be necessary for the government to apply even stricter budgetary controls on the sector’s growth.

This is not the first occasion on which the government has been required to curb solar expansion and a close eye will be kept on deployment trends over the coming months.

Regulator to take “more aggressive” approach, says new chief

The new chief executive of energy regulator Ofgem has promised swifter action to improve the gas and electricity markets. Dermot Nolan was quizzed on 8 May by MPs on the energy and climate change select committee. While acknowledging that regulators “always seem to take time” to act when market problems are identified, Nolan said there were “legal risks” in implementing measures before fully consulting stakeholders. But he added: “It may be time to take a few more risks in the interests of getting things done speedily […] I think it is reasonable that a regulator would say “right, we are going to take a slightly more aggressive approach”.” Nolan declined to set an appropriate profit margin for energy suppliers to make from their customers, arguing that this could have the effect of “dampening competition”. He said that companies needed to earn profits and that the regulator should focus on delivering “competitive” rather than “co-ordinating” devices to the market.

Competition in business energy markets hits new high

A new report has shown that the business gas and electricity markets “are the most competitive they have ever been”. Increasing scrutiny Households and businesses in Britain consume around 300TWh of electricity every year, with nearly two-thirds of this demand coming from business customers. Of the 600TWh of gas supplied, business customers provide around 40% of demand. Media and political scrutiny of the non-domestic energy markets has risen alongside that of thedomestic in recent months, amid growing concerns about the competitiveness of UK businesses in the face of rising energy prices. Growing competition But a study, published on 30 April by industry association Energy UK, found that competition in business markets, though already well-established, had been growing in recent years. At 31 October 2013, a record 30 companies were found to be supplying gas and electricity to business customers. The study, prepared by Cornwall Energy, further showed that around 80% of the gas and 20% of the electricity used by business customers was from companies outside the six largest household suppliers. Energy UK chief executive Angela Knight said the non-domestic sector was becoming increasingly competitive and transparent. “Independent suppliers have seen a large increase in customers from the business community”, she added. The analysis highlights the steady improvement in the state of the market.

Labour to prioritise renewable gas

The Labour Party has said it will focus on the development of renewable gas “as a cost-effective and low-carbon source of heating”, if elected in 2015. Analysis published by National Grid in 2009 suggested that, with government policy backing, “green gas” had the potential to make a major contribution towards meeting consumer demand. Speaking on 14 May, shadow energy and climate change secretary Caroline Flint said that “greening the gas network” was “the big overlooked area” of energy policy. Renewable gas could, she argued, improve the UK’s energy security, help it to reduce its carbon emissions, and provide a solution to waste management as landfill capacity declined. Flint added: “It could do all of this using existing infrastructure – the gas grid – which has largely been paid for consumers. It doesn’t require new heating systems in people’s homes or new network infrastructure.” European countries such as Germany and France already have renewable gas being injected into the grid. Labour said it would, if elected next year, commission the government’s climate adviser, the Committee on Climate Change, to work alongside National Grid to provide recommendations on the reforms needed to maximise the potential for renewable gas development.

Fracking should be national priority, say Lords An influential committee of Peers has criticised the slow pace of progress towards the development of a shale gas industry in the UK. Economic potential The coalition government has committed to going “all out for shale”, believing that the resource can support the UK’s low-carbon transition while delivering significant economic benefits. A series of fiscal and regulatory measures related to the sector have been announced over the past year, which have sought to incentivise shale gas exploration. In a report, published on 8 May, the Lords economic affairs select committee said that the UK was “exceptionally fortunate” to possess substantial onshore oil and gas resources, and that exploration and appraisal was needed in order to assess their economic potential. But the committee said it was disappointed that the exploratory drilling and hydraulic fracturing (“fracking”) needed for shale gas development had hardly begun. It found that, since the lifting of the government’s moratorium on fracking in 2012, the Environment Agency had not received a single application for the permits necessary for exploratory drilling. The report said that creating a shale gas industry would allow the UK to reduce its energy imports, and that this would be especially valuable in light of the continuing fall in output from the North Sea. Falling behind Committee chair Lord Macgregor said that while the US had “raced ahead” with fracking in recent years, the UK had “not yet left the starting gate”. He argued that the government’s measures to simplify the regulatory regime for shale gas exploration had “not gone far enough”, and that there was an “unnecessary duplication and diffusion of authority” throughout the process. Macgregor said that developing a shale gas industry should be an “urgent national priority”. The report was criticised by environmental groups, who claimed that the public would be concerned by calls to “simplify” the regulatory process when they remained unconvinced about the need for shale gas drilling.

UK likely to surpass energy efficiency goals

The government has confirmed that it expects the UK to exceed its energy efficiency target for 2020. Energy consumption in the UK has been on a downward trend over the past decade, with final energy consumption now 12% lower than it was in 2005. As part of its commitments under the EU’s Energy Efficiency Directive, the UK is seeking to reduce its consumption by 18% by the end of the decade. The government’s National Energy Efficiency Action Plan, which was issued on 30 April, said the UK was expected to exceed its 2020 energy consumption target by 2%. This, the plan said, would be achieved through a number of policy measures, and would include 26TWh of energy savings from the Carbon Reduction Commitment, which seeks to cut carbon emissions from UK businesses. The government said that installing smart meters in non-domestic buildings across the UK would provide 18TWh of energy savings, while rail electrification and the development of low-emissions vehicles would reduce demand by a further 8TWh.

Small businesses lack confidence in energy market, poll finds

Over eight in 10 small firms doubt that energy suppliers care about their needs, a new survey has revealed. Research published by the Federation of Small Businesses (FSB) on 22 May indicated that there was “some way to go” before energy companies regained the trust of their non-domestic customers. Four in five small firms said that, alongside pledges to end auto-rollover contracts, the major suppliers should publish their tariffs, as this would result in more competitive pricing and easier switching. Two thirds of small companies said that they found it difficult to switch energy suppliers, explaining that notice periods were unclear and contract terms were complicated.

Green Investment Bank commits to food waste plant The UK’s Green Investment Bank (GIB) has announced a £7.5mn commitment to a new anaerobic digestion and green waste composting plant in Enfield, just outside London. The plant will be powered annually by around 30,000 tonnes of waste, from local businesses, which would otherwise have been sent to landfill. The facility will generate 7,400MWh of electricity each year. Speaking on 13 May, GIB chief executive Shaun Kingsbury said that that “real momentum” was developing behind the deployment of anaerobic digestion, and that further progress was likely in the year ahead. The GIB’s investment will be matched by a further £7.5mn from the Foresight Environmental Fund. Construction of the plant is expected to begin in June 2014, with the facility operational within two years.

Homeworking key to cutting business emissions: report Increasing the number of UK employees working from home can save over three million tonnes of carbon a year, a study has claimed. The paper, published on 20 May by the Carbon Trust, said that, while 40% of UK jobs were compatible with working from home, only around 35% of companies had a policy that allowed their employees to do so. It noted that increasing the level of homeworking would reduce employee commuting – resulting in carbon and cost savings – and that “rationalising” office space to reflect this could help further to cut energy consumption. However, the report acknowledged that these savings could be undermined by “rebound effects”, particularly the increased carbon emissions from employees working in energy inefficient homes. It therefore recommended that businesses took into account individual circumstances before considering their policies towards homeworking.

Government seeks views on CRC report improvements The government has confirmed plans to enhance the Annual Report Publication (ARP) of the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. As part of CRC Scheme simplification in 2013, the government decided to replace the Performance League Table (PLT), which was deemed as too complex, with the ARP. The first ARP was published last November. To ensure the CRC scheme remains an effective scheme for delivering energy use reductions, on 21 May the government set out plans to enhance the ARP as a reputational driver of energy efficiency. In particular the government is seeking views on how best to use the ARP to give participants public recognition of achievements and investments in on-site renewables. It is also asking whether the ARP should include more detailed energy use and turnover. Responses from CRC participants are welcomed by 2 July.

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